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Daily Newsletter, Monday, 06/09/2003

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The Option Investor Newsletter Monday 06-09-2003
Copyright 2003, All rights reserved. 1 of 2
Redistribution in any form strictly prohibited.
In Section One:
Wrap: Monday Blues
Futures Wrap: Where the buffalo roam
Index Trader Wrap: Indexes retreat on Freddie Mac shakeup
Weekly Fund Wrap: All Mutual Fund Indices Advance
Traders Corner: Getting Ready to Launch
Posted online for subscribers at http://www.OptionInvestor.com
*******************************************************************
MARKET WRAP (view in courier font for table alignment)
*******************************************************************
06-09-2003 High Low Volume Advance/Decl
DJIA 8980.00 - 82.79 9066.45 8945.59 1612 mln 875/2019
NASDAQ 1603.97 - 23.45 1625.61 1597.32 1808 mln 1083/2003
S&P 100 491.34 - 4.33 495.67 489.55 totals 1958/4022
S&P 500 975.93 - 11.83 987.76 972.56
RUS 2000 444.79 - 9.15 453.94 444.56
DJ TRANS 2481.54 - 34.06 2480.34 2442.86
VIX 23.71 + 0.28 24.66 23.67
VIXN 37.20 + 1.07 37.66 36.78
Put/Call Ratio 0.78
*******************************************************************
Monday Blues
by James Brown
The market pull back in Monday's session was no surprise after
Friday's high-volume reversal day. For days market analysts have
been parroting the same line (in stereo), "Yes, we're bullish on
the markets but cautious on the short-term. The markets have
come too far, too fast." The bulls' run on Wall Street appears
temporarily exhausted as they pause to catch their breath. Or
has it? How deep (or shallow) would be pull back have been had
it not been for the downpour of bad news today?
The DJIA fell some 82 points to close under the 9000 level as
shares of Boeing (BA) and Walt Disney (DIS) led 27 of the 30
components into the red. Seeing green were shares of IBM, which
bounced 2.4 percent off support at the $80 level. The NASDAQ
composite lost 23 points to close at 1603. The S&P 500 index
dropped nearly 12 points to just under 976. Out of the twenty
sector-specific indices I watch only one closed in the green and
that was the OSX oil services index, which gained 40 cents to
close at 96.60.
Chart of the Dow Jones Industrials:
Chart of the NASDAQ Composite:
Chart of the S&P 500 Index:
As you could expect market internals were negative with declining
issues rushing past advancing issues by 20 to 8 on the NYSE and 2
to 1 on the NASDAQ. New highs took a big step back coming in at
266 to just 15 new lows. Volume was still decent with 1.6
billion on the NYSE and 1.8 billion on the NASDAQ but down volume
swamped up volume almost 5-to-1 on the Big Board and more than 3-
to-1 on the NASDAQ. Volatility indices, which had been
rebounding from their late May lows, continued to climb higher.
Freddie's Financial Faux Pas
Freddie Mac (NYSE:FRE), the U.S. government-backed home loan
lender, lost more than 16 percent to close at $50.26 after
announcing the company's plan to clean house with its upper
management team. FRE said that its chairman and chief executive
officer was retiring, that its CFO was resigning and that its COO
was being terminated. The culprit, once again, was revenue
recognition (the same issue IBM is being probed for). It appears
that FRE's COO is alleged to have been less than honest with the
company's audit committee and that he was material in managing
the company's numbers in a practice called "smoothing". In this
case, FRE under reported past profits to be accounted for later
during slow quarters, hence the smoothing out of its relative
performance quarter over quarter. While any restatements of
FRE's earnings between 2000 and 2002 would likely raise previous
results FRE felt that these "profits" would be counterbalanced by
slower results in the future.
OptionInvestor suggested buying puts or going short Freddie Mac
two weeks ago when the stock broke down through its rising
channel on news that it was losing market share to its rival
Fannie Mae (FNM). Unfortunately, the broader market's strength
was too infectious and lifted FRE back above resistance at its
200-dma and the $60.00 level and we were stopped out. FRE is
such a major player in the mortgage market (between FRE and FNM
they control more than 40% of the U.S. mortgage market) that one
could have assumed that such a shake up would have done even more
damage to the stock and investor confidence. It's probable that
because any earnings revisions are expected to be higher that the
sell-off was less severe than it could have been. Still, the
news helped drive investors to the safety of bonds and
accelerated some of the profit taking already under way in the
overbought home building sector.
Motorola Warns
Hitting the telecom and wireless sectors today was news that
Motorola Inc (NYSE:MOT) would not meet its expectations when it
announces earnings in July. In what could be the beginning of a
very long and high profile earnings warning season, MOT said it
would earn 2 cents a share compared to analysts' consensus
estimates of 4 cents for the second quarter. MOT lowered its
revenue numbers to between $6.0 to $6.2 billion, down from $6.4
to $6.6 billion. The company blamed excess inventories in Asia,
slow sales due to the SARS outbreak and a Japanese earthquake
that disrupted its semiconductor manufacturing. Shares of MOT
lost 2.36% to close at $8.68.
More Monday Mergers
The ongoing software soap opera between Oracle (ORCL), PeopleSoft
(PSFT) and J.D.Edwards (JDEC) continues to take center stage for
merger highlights but General Dynamics made its own move in the
defense sector today. General Dynamics (NYSE:GD) dropped $1.42
to $67.19 after announcing its plan to buy Veridian Corp
(NYSE:VNX) for $1.23 billion and assuming its $270 million in
debt. The buyout is worth $35.00 a share for VNX and shares
gapped higher to close up 26% at $34.48. As the U.S. defense
budgets are likely to swell over the next few years, GD's move to
buy VNX may be a smart one. Veridian's products are aimed at the
intelligence community and provide surveillance, reconnaissance
and more. All of which are critical as America pursues its war
on terror. Meanwhile the software sector brouhaha grew louder as
Oracle's Larry Ellison requested a meeting with the board of
directors for PeopleSoft in an attempt to push its hostile
takeover bid to the next level. The CEO of J.D. Edwards, who had
planned to merge with PSFT, said ORCL's move was anti-competitive
and would not likely pass the U.S. or European anti-trust
agencies.
Ratings Ruffle
Who said timing the markets was impossible? Professional
analysts seem to have impeccable timing. There were nearly forty
downgrades released today that only contributed to the market
weakness and gave traders even more of an excuse to take profits.
Some of the downgrades making the headlines were QLGC, ADBE and a
slew of telecom stocks. Goldman Sachs cut semiconductor maker
QLogic Corp (QLGC) to an "underperform" from an "in-line".
Goldman's analyst claimed that shares were looking pricey and the
company may not be able to maintain its profit margins. The
analyst at Punk, Ziegel & Co. were less forgiving and cut QLGC to
a "sell". The stock lost four percent and was a drag on the SOX,
which fell 2.4 percent.
Enduring another analyst sting were shares of Adobe Systems
(ADBE). Smith Barney downgraded ADBE on valuation concerns and
lowered it to "underperform" from "in-line". ADBE has been a big
winner for investors this last year after trading under $17.00
last August. Smith Barney reiterated its $36 price target and
shares of ADBE dropped 5% to close at $35.40. Adobe is expected
to announce earnings this Thursday, June 12th, after the markets
close.
Further undercutting technology stocks was a downgrade from
Lehman Brother's on a number of telecom services/communication
equipment companies. Slashed from "equal weight" to
"underweight" were Nortel Networks (NT), Tellabs (TLAB), Sonus
Networks (SONS) and ADC Telecommunications (ADCT). Lehman felt
that the telecom services industry was "gradually recovering &
should return to positive growth by 2005". The four unlucky
stocks above were cut on valuation concerns claiming they had all
appreciated too much during the recent rally. Meanwhile in the
same note the brokerage actually raised its rating on SBC and
upped its price targets on Verizon (VZ) and BellSouth (BLS).
Energy Concerns
Yet another card in the bear's poker hand is rising energy costs.
Last week crude oil (August contracts) prices broke out above
resistance in the $28.50-28.65 (a barrel) range and today they
closed above $30.00. Industry watchers are anxiously waiting for
the OPEC meeting to be held on Wednesday. Also fueling concerns
is the rise in natural gas prices. Natural gas is up more than
30 percent year to date and they have more than doubled since
February 2002. FinancialTimes ran an article stating that U.S.
supplies have hit critically low levels. At the end of March
natural gas supplies were down to 696 billion cubic feet of gas,
which is the lowest level since recording began back in 1976.
Supplies have sunk even lower since then. Look for the financial
media to cover Alan Greenspan's testimony on the natural gas
shortage before the House Energy & Commerce committee tomorrow.
Tomorrow
If you've not already locked in your profits from the three-month
market rally then now may be a good time to do so. If not, be
sure you're happy with your stop losses. The markets need this
pull back to consolidate some gains and give us a base from which
the bulls can attempt another leg higher. Now that Motorola has
kicked off the earnings warning season it is time for us to
become a little more cautious.
************
FUTURES WRAP
************
Where the buffalo roam
Jonathan Levinson
It was a glum open for equities, which faded through the morning
and settled quickly into a narrow, excitement-free range, at the
middle of which the indices closed. This rangebound action was
impressive in light of the pre-open MOT warning and news of the
resignation of FRE's top management on word of possible
accounting improprieties.
Daily Pivots (generated with a pivot algorithm and unverified):
Figures rounded to the nearest point:
R2 R1 Pivot S1 S2
ES03M 1000 988 980 969 961
YM03M 9159 9073 9006 8920 8853
NQ03M 1237 1216 1202 1181 1167
Intraday QQQ
10 minute chart of the US Dollar Index
Despite the President's comments about his administration's
commitment to a "strong dollar policy" going beyond John Snow's
"resistance to counterfeiting" blather, the US Dollar Index
showed little life in during today's session.
Daily chart of June gold
Gold had a relatively poor day, closing at its lows at 361.50,
but still never challenging its first support line at 359 within
the context of its ongoing downphase. There are no buy signals,
but the shallowness of the pullback continues to reassure
goldbugs. The CRB finished lower by .75 at 236.68 led by wheat
and cotton.
Daily chart of the ten year note yield
Treasuries found buyers again today, with the ten year note yield
giving back all of Friday's gains to close just off its low of
the day.
Daily NQ candles
On the daily NQ3M candles, I have drawn a tentative rising
support line. I am not particularly comfortable with it and left
it off the other daily charts, but it's here mostly to put
Friday's and today's declines in perspective. On a six month
chart, there was very little damage done by Friday's huge volume
doji reversal. Today would qualify as a spinning top on a
candlestick basis, not "top" as in high point but as in the
children's toy, with equities displaying pure uncertainty with an
unpper and lower spike and price closing in near the middle of
the range.
30 minute 20 day chart of the NQ
While the daily NQ3M chart shows the oscillators on sell signals,
the 30 minute chart shows buy signals. This is predictable as
the price bounced off its lower channel support right on
schedule, bring the oscillators up from oversold territory. We
expect an up-phase on the shorter cycle within the longer cycle
downtrend indicated by the daily candles. Support is at the 50%
retracement line, and intraday we saw this at 1189 NQ.
Resistance is 1202.
Daily ES candles
We have the same picture on the daily ES, with today's session
consolidating the losses from Friday and delivering a sell signal
on the stochastic. As with the NQ, it's a preliminary signal,
and if the 30 minute chart upcycle packs more oomph than I
expect, it could undo the stochastic crossover that we see
tonight.
20 day 30 minute chart of the ES
Support came at 972, resistance at 990. We have the same buy
signals on the shorter cycle oscillators, portending early
morning strength tomorrow.
Daily YM candles
On the YM, most notable was the close below 9000. My father, who
doesn't follow the US markets closely, noted 9000 as proof that
bears were out of Schlitz for this year. We can expect some
psychological fallout from the failure to close above The Number
today on the part of casual investors. However, once again, the
sell signals on the daily oscillators are very fresh and could be
undone if there's a strong close tomorrow. YM has support at
8940, resistance at 9000.
20 day 30 minute chart of the YM
For tomorrow, we'll have the shorter cycle oscillators duking it
out with the longer cycles. This could resolve itself with more
rangebound chop, or we could get a breakout. Easiest is to watch
the range support and resistance wait for a breakout. Given the
force of Friday's move, today's quiet shouldn't last for long.
********************
INDEX TRADER SUMMARY
********************
Indexes retreat on Freddie Mac shakeup
The major market indexes were under selling pressure for the bulk
of today's trade as an earning's warning from Motorola (NYSE:MOT)
$8.68 -2.36% set technology sectors back early, while a shakeup
among the nation's number 2 mortgage financier Freddie Mac
(NYSE:FRE) $50.26 -16% renewed fears of corporate malfeasance and
lack of regulatory oversight.
Today's "lack of bullish news" comes at a time with many of the
bullish % indicators are at historical highs and "overbought"
levels and gave many profitable bulls plenty of reason to lock in
some gains.
Dow Industrials Chart - 50-point box
Today's trade at 9,050 was enough to see a 3-box reversal back
lower in the Dow, and for now, the current pullback would be
simply interpreted as profit taking. The "blue ?" is my
envisioning of trade and how I might look for the Dow to trade
under still bullish market conditions. I made note that both IBM
and MSFT traded RELATIVELY strong compared to the Dow today, as
both stocks had been trading AGAINST the Dow in recent sessions.
When I see under-performers (especially sector bellwethers)
DIVERGE from the markets, today's action certainly hints of
short-covering on broader market weakness. If bears are going to
cover weaker stocks, then they should be expected to cover some
of the stronger components that traded lower again today on
profit taking.
One "term" that traders and investors should probably be
accustomed to in the coming weeks is "valuation" calls by
institutions and their downgrades. It's a polite way of them
telling investors that they have ALREADY told their institutional
clients to take profits as bullish gains may have become a bit
excessive.
S&P 500 Index Chart - 5 and 10-point box
Today's trade at 985 in the SPX was enough for a 3-box reversal
and first sign of some softening. You will note that I've
changed the "box size" to 10-point intervals above 1,000, this is
because price above there becomes "less meaningful" at 5-point
intervals (www.stockcharts.com has their box size at 50-point,
but that's TOO MEANINGFUL a move in my opinion).
In today's 01:00 PM Update, I showed the bar chart of the SPX
with MONTHLY and WEEKLY retracement overlaid, along with the
December high of 954.28. With the BIG "blow off" type move we
saw from the SPX after the trade at 915 and reversal back up, I'm
looking for even the most BEARISH of BEARS to be looking for
cover on a pullback at/near 959 and overlapping support levels
from pivot analysis work. As such, I'm being rather conservative
at this point with by bearish target of 965 after profiling a
bearish trade in the SPX on today's break lower at 982.
Today's trade saw the S&P 500 Bullish % ($BPSPX) fall a WHOPPING
0.2%. In essence, the S&P 500 saw a net loss of just 1 stock to
a point and figure sell signal.
Now... one thing I'm trying to do as it relates to the SPX chart
as I did with the Dow Industrials Chart is try and "envision" how
a trade might results, where the SPX gives a "sell signal"
similar to more stocks in the SPX, that would eventually generate
"sell signals" of their own to then have the very high levels of
bullish % begin to deteriorate.
Right now, it might take an SPX trade at 910 for any marked
deterioration in the SPX bullish %, but a more "feasible" type of
trade would be an SPX pullback to 965, a rebound back to 990, and
THEN a double-bottom sell signal at 960, or something like this.
S&P 500 Index (SPX.X) - Daily Interval
Here's the same bar chart of the SPX that I showed in today's
01:00 PM EST update. The SPX hovered around the 975.94 level for
the bulk of the afternoon session, and break that level, which I
thought would find a close at the low by session's end, but a
little rebound came into the close.
I would NOT want to be OVER LEVERAGED from the short/put side
here. I think there are probably TOO MANY traders OVER LEVERAGED
already, and I would be concerned about and short-covering rally
back above 987, or WEEKLY Pivot at this point.
S&P 100 Index Chart - Daily Interval
SPX traders will want to probably keep a close eye on the OEX in
tomorrow's trade and it would be my thinking that a "zone of
support" from 487.94-489.48 needs to be cleared for thought that
a target of WEEKLY S1 can be achieved. It took 2-days for the
OEX Stochastics to reach "oversold" on the DAILY chart in mid-
May. From there, the OEX set up an "inside day" and a rebound to
new highs took place. If short/put the OEX right now, would be
looking to trade for any bearish gains on a trade near WEEKLY S1
of 484.20 should Stochastics reach oversold.
Today's trade saw not net change in the S&P 100 Bullish %
($BPOEX). On Friday, we saw a net gain of 2 stocks to new point
and figure buy signals to 78%, which is where we stand at the end
of today's trade. The 78% level was a relative high reading for
this indicator in March of last year.
NASDAQ-100 Tracking Stock (QQQ) - Daily Interval
As it relates to the pivot analysis retracement, the QQQ and NDX
are a little "weaker" in their pivots. On Friday, the QQQ/NDX
were the two indexes that DID not trade their MONTHLY R2s, while
the INDU/SPX/OEX did intra-day. Now we see the QQQ trading its
MONTHLY 38.2% retracement.
Shorter-term traders may want to monitor this tomorrow and have
an upside alert set on the QQQ at approximately $29.82 (just
above our WEEKLY 61.8% retracement). A move above that level
tomorrow may well signal a rebound in the QQQ, which could then
build some near-term strength for the INDU/SPX/OEX.
Shorter-term traders may want to play the QQQ/NDX levels against
the INDU/SPX/OEX levels, which are now staggered. Especially
those traders that are trading larger positions over the short-
term.
Here's a quick look at tomorrow Pivot Analysis Matrix. The
"dashed red" levels of correlation are those levels that
correlate within the matrix, but would be deemed "tentative
resistance" as they were traded today. On a more gradual intra-
day type of move higher, these "dashed red" levels may offer more
formidable resistance for a move back lower.
Multiple "solid green" levels between DAILY S2 and WEEKLY S1
exist.
Pivot Analysis Matrix
I will admit to not being a Freddie Mac (NYSE:FRE) $50.26 -16%
expert as it relates to any type of impact today's shakeup at the
company might have on its current business practices of buying
mortgages from many of the regional banks that will originate
mortgages, then sell some of their portfolio in order to free up
further capital for new mortgages, but once again, the S&P Banks
Index (BIX.X) 303.48 -2.54% could be an important index for
traders to be monitoring for strength and/or weakness.
I do know this! If I had traded bullish in the banks on the
technicals of the reverse head and shoulder pattern, got my
objective of 308 and now see BIX.X, I would PROTECT GAINS and not
"wait for the highs to be revisited."
Tonight, Rueters reported that Freddie Mac's government regulator
said it would dispatch a special team to investigate management
practices. Freddie Mac is the number 2 mortgage financier.
Lawmakers have also called for a probe of not only Freddie Mac,
but also the regulators, which is the Office of Federal Housing
Enterprise Oversight (OFHEO).
Jeff Bailey
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WEEKLY FUND WRAP
****************
All Mutual Fund Indices Advance
According to Lipperweb.com, all fixed income and equity averages
were up for the week ended Friday, June 6, with investors wading
back into the financial markets. The average large-cap core U.S.
equity fund gained 2.3% over the 5-day period, slightly trailing
the 2.5% weekly return by the S&P 500 index benchmark. Overseas
markets were higher as well, with the average international fund
up 3.3% for the week, slightly lower than the 3.5% return by the
MSCI EAFE index. Nearly all equity indices were in the 2% to 3%
return range for the 5-day period.
Fixed income fund returns were pale in comparison to stock funds
with the exception of high-yield bond funds, which averaged 1.2%
for the week per Lipper. Global fixed income funds rose by 0.6%
on average last week, while international fixed income funds had
an average weekly return of 0.4%. The average intermediate-term
investment grade bond fund returned 0.2% over the week, matching
the weekly total return of the LB Aggregate Bond index benchmark.
A rise in U.S. employment in May 2003 contributed to price gains
in the bond market.
The average taxable money market fund has a current 7-day simple
yield of 0.70%, according to iMoneynet.com's weekly money market
fund report.
Equity Fund Group
Week YTD Selected Lipper Equity Indices (Jun-06)
+1.7% +9.9% Balanced Fund Average
+2.7% +11.3% Equity Income Fund Average
+3.3% +10.2% International Fund Average
+2.3% +11.6% U.S. Large-Cap (Core) Fund Average
+2.3% +14.7% U.S. Mid-Cap (Core) Fund Average
+2.6% +14.7% U.S. Small-Cap (Core) Fund Average
+2.5% +14.3% U.S. Multi-Cap (Core) Fund Average
+2.3% +24.4% Science & Technology Fund Average
Among large equity funds (assets over $500 million), the highest
weekly return of 5.8% was generated by Oppenheimer Global Growth
& Income Fund B (OGGIX), a "mid-cap growth" driven global equity
fund. Franklin Biotechnology Discovery Fund (FBDIX) was second
with a 5.8% weekly return, while Longleaf Partners International
Fund (LLINX), another mid-cap fund was 5.5% higher for the week.
The Neuberger Berman Focus Trust (NBSSX) returned over 5 percent
as well.
International equity funds produced solid returns for investors
also as evidenced by the 4.8% weekly total return from both the
Vanguard International Value Fund (VTRIX) and Fidelity Overseas
Fund (FOSFX). Glenmede International Portfolio (GTCIX), a mid-
to-large capitalization value fund we've profiled recently, was
up 4.5% for the week. So all in all, another positive week for
the domestic and foreign equity funds.
Balanced funds gained 1.7% on average last week, and are now up
nearly 10 percent on a year-to-date basis through June 6, using
Lipper's numbers. That's not too bad for a fund objective that
seeks to produce high total return consistent with a "low risk"
strategy. Some popular hybrids performing well last week were
Fidelity Asset Manager: Growth (FASGX) up 3.0%, Vanguard Asset
Allocation (VAAPX) up 3.5%, and the Oppenheimer Quest Balanced
Value Fund A (QVGIX).
Fixed Income Fund Group
Week YTD Selected Lipper Fixed Income Indices (Jun-06)
+0.2% +5.0% Corporate A-Rated Debt Fund Average
+0.1% +1.2% GNMA Fund Average
+0.6% +9.6% Global Income Fund Average
+1.2% +14.0% High Yield Fund Average
+0.4% +10.5% International Income Fund Average
+0.2% +5.1% Intermediate Investment Grade Fund Average
+0.1% +3.1% U.S. Government Bond Fund Average
Fixed income funds enjoyed another good week, especially high-
yield fund, which returned 1.2% on average to extend their YTD
returns. According to Lipper, the average high-yield fund has
risen 14.0% since December 31, generating equity-style returns
for investors. Fidelity Advisor High Yield (FAHYX) closed the
week 1.9% higher, followed by Oppenheimer Champion Income Fund
(OPCHX), Franklin AGE High Income AGEFX) and Fidelity Capital &
Income Fund (FAGIX), each up 1.7% for the week. Fidelity's two
high-yield products are up over 25% on a YTD basis through June
6, 2003.
Among non-U.S. bond funds, some of the top weekly total returns
were produced by GMO Emerging Country Debt Fund III (GMCDX), up
2.4%, SEI Emerging Markets Debt Portfolio (SITEX), up 2.3%, and
Fidelity New Markets Income Fund (FNMIX), up 2.2%. Though they
are recognized primarily as stock pickers, Fidelity Investments
has also shown that they are among the best high-yield managers
in the retail marketplace.
Money Market Fund Group
Yield Selected iMoneyNet Money Market Indices
0.70% All Taxable MMF Average
0.66% All Tax-Free MMF Average
Only a handful of money market funds in the retail market have
current 7-day (simple) yields of 1.00% or more. At 1.20%, the
PayPal Money Market Fund (402-935-7733) continues to sport the
highest current yield among prime retail money funds. Next is
Phoenix-Goodwin Money Market Series A (800-243-1574), at 1.17%.
Fidelity Cash Reserves Fund, the nation's largest retail money
market fund with $57 billion in assets, sports a current 7-day
simple yield of 0.98%. Vanguard Prime MMF/Retail sits at 0.90%.
Fund News, Etc.
Morningstar.com reports that the ING Funds has hired Wellington
Management Company to be sub-investment advisor of ING Large Cap
Growth Fund (NLCAX), a growth-driven laggard. If you are in the
ING Large Cap Growth Fund and considering selling now, you might
want to rethink that decision. Wellington is one of the oldest,
most respected money managers in the business and enjoys a long-
lasting relationship as the subadvisor of several Vanguard funds.
Andrew Shilling, who has managed Hartford Growth Fund (FECLX) for
a couple years, limiting losses there, will assume the fund's day
to day portfolio management, Morningstar said.
Speaking of the Hartford Funds, the $1.6 billion Hartford Mid-Cap
Fund A (HFMCX) intends to shut its doors to new investors on July
31. You may not want to let this Morningstar "5-star" rated mid-
cap growth fund close without taking a hard look. The fund is up
an average of 15.1% a year over the past five years including the
market correction of 2000-2002, ranking in the top 2% of its fund
category (i.e. mid-cap growth funds). Philip Perelmuter has been
at the helm since December 31, 1997, fund inception. The fund is
up nearly 25% in the last three months.
Steve Wagner
Editor, Mutual Investor
steve@mutualinvestor.com
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TRADERS CORNER
**************
Getting Ready to Launch
by Mark Phillips
mphillips@OptionInvestor.com
We've now spent a fair amount of time laying the groundwork for
building a trading plan for entering the index futures market.
We've discussed the basics of futures trading, handled many of
the pertinent questions associated with choosing a good broker,
and we've ever so slightly touched on the critical issue of
account management. While I know that many of you are itching to
dive into the charts and dissect some trade setups, I feel we
really need to spend some more time on that account/money
management issue, as it is so pivotal to our long-term success in
this venture.
For those of you just tuning in, you'll want to take the time to
catch up with our discussion at the following links from the
archives.
The Case For Futures
http://www.OptionInvestor.com/traderscorner/tc_050503_1.asp
Planning For The Future(s)
http://www.OptionInvestor.com/traderscorner/tc_051203_1.asp
Back To The Future(s)
http://www.OptionInvestor.com/traderscorner/tc_060203_1.asp
It is my opinion that any trader that is new to the futures arena
(regardless of how much experience you have accrued in other
arenas) should plan to start small and build from small successes
to larger ones. For the sake of setting a benchmark, I'm going
to base our discussion on an assumed account size of $10,000 and
further assume that we'll only be trading the S&P E-mini (ES)
contract. All of our discussions should translate to both larger
accounts and to trading of the DOW E-mini (YM) and NASDAQ E-Mini
(NQ) contracts.
As we've discussed, margin requirements can vary widely between
brokers, but let's work from the basis that it will require $1400
of margin to control a single contract. Clearly that $10,000
account could afford to trade more than a single contract. My
justification for limiting those early trades to only one
contract is that it should help to keep those nasty emotions out
of the equation, or at least relegate them to a smaller role in
the decision making process. Keep in mind, that I'm not
advocating only trading a single contract after working through
the initial learning curve. This is simply a crutch to keep
things manageable in the early going.
Recall that each ES point is equivalent to $50 in profit or loss.
The basic parameters of the trading approach I've adopted (and
that we'll discuss as we move through this series of articles) is
to target one to two trades per day that appear to have the
POTENTIAL to return a gain of from 8-10 points. At the same
time, my initial (and maximum) allowable loss on any given trade
is defined by the initial stop loss at no more than 4 points away
from the entry point. What that translates to is a maximum
possible loss on any given trade of $200. When viewed from the
perspective of a starting account balance of $10,000, should both
trades on a given day stop out for the maximum loss, that's a
total of $400, which should be sufficiently small to keep both
the 'panic' and 'chase' demons at bay. That should keep our
minds free of emotion, allowing us to focus simply on the merits
of the trade we are either in or considering.
Once through the learning curve, I think a good rule of thumb is
to trade from 1-2 contracts per $5000 of account balance,
depending on an individual's tolerance for risk. My personal
trading plan dictates 1 contract per $5000, as I prefer to err on
the side of caution. As I've stated before, I am not an overly
aggressive trader. This applies to both my trade selection
criteria, as well as my account management.
There's another issue that demands our attention at this point,
and it is what I call the Circuit Breaker. We've already defined
the maximum loss that we're willing to take on any given trade,
but in the fast-paced world of futures trading, if we don't have
a limit on the number of losing trades we can take, you can see
that we could very quickly get into trouble. Start out with a
losing trade in the first hour, then take another one near 11am
ET, and without a Circuit Breaker, our emotions are likely to
take over, stimulating the urge to "win it back". Uh-oh! That's
a big danger sign, that I'm sure we've all ignored at some point
in our trading careers. Right or right? Without a defined
maximum daily loss, the urge to chase could have us compounding
the early losses with ill-considered and panicky trades. In a
choppy range-bound session like we saw today, an undisciplined
trader could take 5 or 6 or more trades, none of which ended up
working. Even more important than the financial pain would be
the psychological damage suffered, as the trader continually
hears the market saying, "You're Wrong!". I can't speak for the
ladies in my audience, but I know for us guys, we really don't
like being told that we're wrong. The gut reaction is then to
say, "Oh yeah, I'll show you!". Danger, Will Robinson!
I recognize that even after all the trading I've done over the
years, I am still susceptible to this mental trap and that's why
I devised the concept of a Circuit Breaker for myself. If I take
3 losing trades or lose more than 7 points at any point in the
day, I'm done. Even if that loss threshold is reached in the
first hour of the day, that's it. I'm done. The market has told
me that I'm out of synch with what is happening today. I've
learned through painful experience that when I'm not picking good
trades early in the day, that dynamic is likely to persist right
through the closing bell. Better to shut down for the day and
approach the market anew tomorrow, knowing that my discipline
kept me from doing any serious damage either to my account or to
my psyche.
The bulk of what we covered today is focused on the negative side
of the equation -- minimizing losses. That may seem like a
defeatist approach when what we really want to accomplish is
string together winning trade after winning trade. Any trader,
no matter how good their trade selection criteria, is going to
have losing trades. Probably more than they would like. But if
there is a plan for mitigating those losses, then if the
technical parameters used for initiating and exiting trades is
sound, then the long term equity trend should be on the rise.
I've found that by carefully and methodically controlling the
worst that can happen, I am free to focus on the positive side of
the operation -- making money. Since I know my discipline will
keep me from getting into trouble, my mind is clear to evaluate
trade setups according to the parameters I have defined. Of
course, I haven't yet gotten to that in this series of articles,
and I think I've saved the best for last. Not to minimize the
importance of what we've covered in this series up to now, but I
know you're all itching to get into the charts, indicators, entry
and exit parameters. Afterall, that's how we are going to put
together winning trades, and out of winning trades come profits!
Next week, the charts. See you then!
Mark
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The Option Investor Newsletter Monday 06-09-2003
Copyright 2003, All rights reserved. 2 of 2
Redistribution in any form strictly prohibited.
In Section Two:
Stop Loss Updates: NOC, RYL
Dropped Calls: RJR
Dropped Puts: IBM
Play of the Day: Put - RYL
Watch List: Bears Have Been Sighted
Updated on the site tonight:
Market Posture: Technical Confirmation
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*****************
STOP-LOSS UPDATES
*****************
NOC - put
Adjust from $88.75 down to $87.50
RYL - put
Adjust from $73.50 down to $73.00
*************
DROPPED CALLS
*************
RJ Reynolds - RJR - close: 34.97 change: -1.22 stop: 34.95
What was looking like just an orderly pullback in our RJR play
morphed into a more pronounced selloff this morning after it was
announced that the company's CEO had resigned. That, along with
the broad market weakness drove the stock below our $34.95 stop at
the open and buyers never really managed to put in more than a
half-hearted bounce. After that bounce failed, RJR fell to close
under $35, and despite the close 2 cents above our stop, the
bullish momentum that had first attracted us to the play has been
wiped away. It's time to cut our losses here and move on.
Picked on June 3rd at $36.49
Change since picked: -1.52
Earnings Date 07/25/03 (unconfirmed)
Average Daily Volume = 1.75 mln
************
DROPPED PUTS
************
Intl Bus. Machines - IBM - close: 82.00 change: +1.95 stop: 81.75
After last week's plunge to the $80 level, we didn't want to take
any chances on a strong rebound, and tightened our stop to $81.75.
That seems to have been the right course of action, as Big Blue
bucked the market trend all day. After opening flat, buyers
appeared at each apparent dip, propelling the stock up to close at
$82 and above our stop. This was a nice, quick play on the
negative sentiment surrounding the SEC investigation and it worked
out perfectly, giving us more than a $7 drop from where we picked
it before Monday's rebound. Based on today's relative strength in
IBM, this play has run its course, and it is time to harvest those
gains and look for fresh candidates.
Picked on May 29th at $87.36
Change since picked: -5.36
Earnings Date 04/14/03 (confirmed)
Average Daily Volume = 8.44 mln
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*********************
PLAY OF THE DAY - PUT
*********************
The Ryland Group - RYL - cls: 67.94 chng: -1.80 stop: 73.00*new*
Company Description:
The Ryland Group is a homebuilder and mortgage-finance company
that has built more than 175,000 homes. Additionally, the Ryland
Mortgage Company (RMC) has provided mortgage financing and related
services for more than 155,000 homebuyers. Currently, Ryland homes
are available in more than 260 communities in 21 markets across
the United States.
Why we like it:
On prospects of continued low interest rates and another round of
refinancing and new purchases driving demand for housing,
investors have bid the Dow Jones Home Builders index ($DJUSHB)
higher to the tune of more than 50% in just the past 3 months.
Friday saw that group vault higher to the $460 level, only to
sharply reverse and close near $442 for a complete reversal of
Thursday's gains as well. All of the major home building stocks
saw sharp reversals, but RYL's was one of the most impressive.
Along with the $DJUSHB, RYL touched a new all-time high of $72.90
before slipping back to close below $70 with a 2.5% loss on the
day. Even after that sharp pullback, the stock is still nearly $5
above its 10-dma (currently $65.26) and given the heavy volume on
Friday's pullback, we think there's more bearish price action in
store. But to be perfectly clear, we aren't expecting a waterfall
decline here. This is an aggressive play, where we're looking to
take advantage of a bout of much needed profit taking.
There's no point in even looking at the PnF chart, as it still
says full bull ahead. Remember, this is a gravity play, and when
the stock finds support, we'll want to exit stage left in a hurry.
A continuation down to the $65 level seems pretty certain as
things appear this weekend, but we'd really like to see the daily
Stochastics turn down from overbought (where they've been pinned
for the past 2 weeks) to give some confirmation of the downside
potential. While aggressive traders can try to enter on a failed
intraday bounce below Friday's intraday high, the more prudent
strategy might be to wait for some downside continuation below
Friday's low. So momentum traders will want to key off the $69.50
level, entering on a volume-backed move below that level. While
our initial target is the mild consolidation (also the site of the
10-dma) near $65, we'll keep the possibility in mind that RYL
could really get moving and test major support in the $59-60 area.
Initial stops are set at $73.50, just a bit over Friday's intraday
high.
Why This is our Play of the Day
Our aggressive bearish play on the Home Builders certainly got off
to a positive start on Monday. RYL opened right where it left off
on Friday and then dropped through the $69.50 level that we had
highlighted as a momentum entry point. With weakness engulfing
the $DJUSHB index to the tune of a 2.72% decline, that level was
never tested throughout the day, as RYL headed gradually southward
throughout the session. If not for the end of day short-covering
bounce, the stock would have ended right at its low. Daily
Stochastics have now firmly rolled bearish, leaving behind bearish
divergence and it should be a fairly straight shot down to the
first area of congestion near $65. A failed rebound below the
$69.75 level can now be used for new entries. Due to the
aggressive nature of the play, we're still keeping a wide stop,
lowering it ever so slightly to $73.00 tonight.
Suggested Options:
Short-term traders will want to focus on the June 70 Put, as it
will provide the best return for a short-term play. Those looking
for a larger move down towards the $65 level will want to utilize
the July contracts, which provides greater insulation from the
spectre of time decay. Note that June contracts expire in 2
weeks.
BUY PUT JUN-70 RYL-RN OI=150 at $3.60 SL=1.75
BUY PUT JUL-70 RYL-SN OI=120 at $5.20 SL=3.25
BUY PUT JUL-65 RYL-SM OI=629 at $2.90 SL=1.50
Annotated Chart of RYL:
Picked on June 8th at $69.74
Change since picked: -1.80
Earnings Date 07/23/03 (unconfirmed)
Average Daily Volume = 763 K
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**********
WATCH LIST
**********
Bears Have Been Sighted
New Century Financial - NCEN - close: 45.98 change: -3.18
WHAT TO WATCH: We don't know whether today's 6.4% loss was just
overdue profit taking or NCEN was guilty by association as
traders reacted to the FRE news (both are in the mortgage
business). A move under the top of the gap at $44.75 might be
worth a trade to the bottom of the gap near $40.00.
Chart=
---
Avid Technology - AVID - close: 33.61 change: -2.46
WHAT TO WATCH: Shares of AVID fell more than 6.8% today on strong
volume of 1.2 million shares. The close brought the stock back
below its $35.00 level and the 10-dma. This computer peripheral
stock could easily retrace back to the $30.00 level if not its
old resistance near $28.50.
Chart=
---
eBay Inc - EBAY - close: 97.00 change: +0.03
WHAT TO WATCH: Whether you're a bull or a bear you have to admit
that shares of EBAY are holding up pretty well. If you're
bullish on the stock then keep an eye out for a pull back to the
50-dma, which shares have not broken since the rally began back
in October 2002. The 50-dma is at $94 and there is a lot of
congestion between $92 and $95 for the stock. The company has
its annual shareholder meeting in late June.
Chart=
---
SanDisk Corp - SNDK - close: 34.75 change: -1.17
WHAT TO WATCH: SNDK was on the weekend watch list and we still
think it looks tempting. Shares had more than doubled from their
April lows and are way overdue for some profit taking. Friday
the chart produced a bearish engulfing candlestick and the close
under support at $35.00 today along with the bearish crossover in
its extended MACD only confirms the move.
Chart=
**************
MARKET POSTURE
**************
Technical Confirmation
To Read The Rest of The OptionInvestor.com Market Watch Click Here
http://www.OptionInvestor.com/marketposture/mp_060903.asp
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